What is a currency pair?

In the foreign exchange market, currencies are traded in pairs. The two constituent currencies of a currency pair are interrelated and inseparable.

The two constituent currencies of a currency pair are exchanged for each other in a transaction. Their exchange price is called the exchange rate. The exchange rate is affected by the supply and demand of currencies.

The most common currency

The currency most commonly traded in the market is called the "major currency". Most currencies are bought and sold relative to the U.S. dollar (USD). The U.S. dollar (USD) is the currency with the most transactions. The next five frequently traded currencies are: Euro (EUR); Japanese Yen (JPY); British Pound (GDP); Swiss Franc (CHF) and Australian Dollar (AUD). Trading in these six major currencies accounted for 90% of the trading volume in the global foreign exchange market.

The most common currency pair is the Euro/U.S. dollar (EUR/USD).

exchange rate

Exchange rates change rapidly. The supply and demand of the market determines the value of currency, and the value of one currency in the foreign exchange market is represented by another currency. In a currency pair, the first currency is called the "base currency" and the second currency is called the "quotation currency" or "counter currency".

When you conduct currency transactions, you buy the base currency and sell the quote currency. The exchange rate tells the buyer how much the quote currency it will cost to buy a unit of the base currency. The order of currency pairs is usually unchanged, which is a common practice in the industry. For example, the currency pair USD/JPY (USD is the base currency and JPY is the quote currency). The order of the currency pairs you see will not change. Therefore, whether you buy or sell depends on the direction of the transaction. For example: USD/JPY-You can buy JPY with USD or buy USD with JPY. You can check the order of each tradable currency in the currency pair on the Easy-ForexTM website.

For example: EUR/USD 1.2500 means that you need to use 1.25 US dollars to buy 1 euro. It can also be said that if you sell 1 euro, you will get 1.25 US dollars. All transactions involve buying one currency and selling another currency at the same time. If on the second day, the euro appreciates against the US dollar and the exchange rate becomes 1.26, then every euro you bought will bring you 1 cent in return. If you trade in the opposite direction, then every euro you sold (sold at 1.25) will bring you a loss of 1 cent (because 1 euro at this time requires you to take 1.26 US dollars to "repurchase" ).

Buying and selling currency

In the foreign exchange market, traders make profits by buying and selling currencies. Currency has two prices: the buying price, called the "bid price" and the selling price, called the "outgoing price".

The difference between the asking price and the bid is the "spread". It represents the difference between market makers buying and selling from dealers.

For example: The bid/ask price of EUR/USD is 1.2100/1.2200. The market maker buys 1 Euro from the dealer for $1.21, but sells the 1 Euro to the dealer for $1.22. If traders buy and sell quickly without changing the exchange rate, they will suffer losses. This is caused by the spread-because the dealer’s buying price is higher than their selling price.

In fact, the spread is the main source of income for market makers. As in other markets, the seller’s selling price is higher than the buying price.

Quotation

The "quote" is the price of the currency. There are two forms of quotation in the foreign exchange market: direct quotation and indirect quotation.

The direct quote is the price per dollar expressed in other currencies.

The indirect quotation is the price per unit of other currencies expressed in U.S. dollars.

Please note: Generally speaking, most currencies are quoted relative to the U.S. dollar (for example-"direct quotes").

However, EUR, GBP, AUD, NZD and (Gold XAU and Silver XAG) all use indirect quotations, such as GBP/USD.

The quote is the price at which the currency pair is traded. It is different from the "reference quotation". The reference quotation is information provided by the market maker for reference only (for traders to understand, not the real execution price).